Yandex Announces Second Quarter 2015 Financial Results

MOSCOW and AMSTERDAM, Netherlands, July 30, 2015 (GLOBE NEWSWIRE) -- Yandex (NASDAQ:YNDX), one of Europe's largest internet companies and the leading search provider in Russia, today announced its unaudited financial results for the second quarter ended June 30, 2015.

Cash, cash equivalents and deposits of RUB 46.9 billion ($845.1 million) as of June 30, 2015

"We grew our consolidated revenues 14% in a challenging economic environment," said Arkady Volozh, Chief Executive Officer of Yandex. "The total number of advertising clients served during the quarter grew by 9% sequentially and 17% year-over-year, demonstrating that contextual advertising remains a highly effective marketing channel for businesses of every size. We remain focused on improving the quality of our search products, including mobile search, as well as our advertiser solutions. Later in Q3, we plan to introduce a new auction mechanism that we expect will increase the quality of traffic we drive to our advertising clients and facilitate the overall growth of online advertising."

The following table provides a summary of key financial results for the three months and six months ended June 30, 2014 and 2015:

In RUB millions

Three months

Six months

ended June 30,

ended June 30,

2014

2015

Change

2014

2015

Change

Revenues

12,158

13,920

14%

23,043

26,259

14%

Ex-TAC revenues2

9,507

10,898

15%

17,824

20,520

15%

Income from operations

3,631

2,196

-40%

6,349

3,682

-42%

Adjusted EBITDA2

5,027

4,817

-4%

9,069

8,388

-8%

Net income

2,396

423

-82%

5,076

2,550

-50%

Adjusted net income2

3,318

2,791

-16%

5,870

5,040

-14%

1 Pursuant to SEC rules regarding convenience translations, Russian ruble (RUB) amounts have been translated into U.S. dollars at a rate of RUB 55.5240 to $1.00, the official exchange rate quoted as of June 30, 2015 by the Central Bank of the Russian Federation.

2 The following measures presented in this release are "non-GAAP financial measures": ex-TAC revenues; adjusted EBITDA; adjusted EBITDA margin; adjusted ex-TAC EBITDA margin; adjusted net income; adjusted net income margin and adjusted ex-TAC net income margin. Please see the section headed "Use of Non-GAAP Financial Measures" below for a discussion of how we define these measures, as well as reconciliations at the end of this release of each of these measures to the most directly comparable US GAAP measures.

Yandex's operating costs and expenses consist of cost of revenues, product development expenses, sales, general and administrative expenses (SG&A), and depreciation and amortization expenses (D&A). Apart from D&A, each of the above expense categories includes personnel-related costs and expenses, relevant office space rental, and related share-based compensation expense. Increases across all cost categories, excluding D&A, reflect investments in overall growth, including personnel. In Q2 2015, Yandex reduced the number of its full-time employees compared to Q1 2015. The total number of full-time employees was 5,458 as of June 30, 2015, an increase of 3% compared to June 30, 2014 and a decrease of 3% compared to March 31, 2015.

Costs of revenues, including traffic acquisition costs (TAC)

In RUB millions

Three months

Six months

ended June 30,

ended June 30,

2014

2015

Change

2014

2015

Change

TAC:

Related to the Yandex ad network

1,804

2,113

17%

3,593

3,979

11%

Related to distribution partners

847

909

7%

1,626

1,760

8%

Total TAC

2,651

3,022

14%

5,219

5,739

10%

Total TAC as a % of total revenues

21.8%

21.7%

22.6%

21.9%

Other cost of revenues

776

960

24%

1,540

1,956

27%

Other cost of revenues as a % of revenues

6.4%

6.9%

6.7%

7.4%

Total cost of revenues

3,427

3,982

16%

6,759

7,695

14%

Total cost of revenues as a % of revenues

28.2%

28.6%

29.3%

29.3%

TAC grew 14% compared with Q2 2014 and slightly decreased as a percentage of total revenues to 21.7% in Q2 2015. This is compared with 21.8% in Q2 2014 and 22.0% in Q1 2015. Our partner TAC grew 17%, slightly slower than revenues from our advertising network mostly due to changes in our partner revenue mix. Partner TAC includes traffic acquisition costs related to both our text-based and our display advertising networks.

Other cost of revenues in Q2 2015 increased 24% compared with Q2 2014, primarily reflecting an increase in rent expenses and personnel expenses. The increase in rent expenses is attributable to the material appreciation of the U.S. dollar in Q2 2015 compared to Q2 2014, as the rent for our Moscow headquarters is U.S. dollar-denominated. A portion of this increase also reflects the additional space that we leased for our Moscow headquarters in May 2014.

Product development

In RUB millions

Three months

Six months

ended June 30,

ended June 30,

2014

2015

Change

2014

2015

Change

Product development

2,079

3,300

59%

4,083

6,647

63%

As a % of revenues

17.1%

23.7%

17.7%

25.3%

Growth in product development expenses in Q2 2015 primarily reflects growth of personnel expenses mainly related to salary increases effective in early 2015 as well as increases in our rent expenses described above. Our development headcount increased 5% from 3,106 as of June 30, 2014, to 3,272 as of June 30, 2015, with a net decrease of 118 employees compared to March 31, 2015.

Selling, general and administrative (SG&A)

In RUB millions

Three months

Six months

ended June 30,

ended June 30,

2014

2015

Change

2014

2015

Change

Sales, general and administrative

1,907

2,568

35%

3,669

4,871

33%

As a % of revenues

15.7%

18.4%

15.9%

18.5%

SG&A costs grew 35% compared with Q2 2014. The growth was primarily driven by an increase in rent expenses for our Moscow headquarters related to the SG&A category as well as by additional advertising and marketing expenses.

Share-based compensation (SBC) expense

SBC expense is included in each of the cost of revenues, product development and SG&A categories discussed above.

In RUB millions

Three months

Six months

ended June 30,

ended June 30,

2014

2015

Change

2014

2015

Change

SBC expense included in cost of revenues

23

41

78%

42

84

100%

SBC expense included in product development

165

395

139%

335

774

131%

SBC expense included in SG&A

87

158

82%

153

296

93%

Total SBC expense

275

594

116%

530

1,154

118%

As a % of revenues

2.3%

4.3%

2.3%

4.4%

Total SBC expense increased 116% in Q2 2015 compared with Q2 2014. The increase is related to the material appreciation of the U.S. dollar in Q2 2015 versus Q2 2014, to new equity-based grants made in 2014 and 2015, as well as to the SAR-for-RSU exchange program executed in Q2 2015 described below.

Depreciation and amortization (D&A) expense

In RUB millions

Three months

Six months

ended June 30,

ended June 30,

2014

2015

Change

2014

2015

Change

Depreciation and amortization

1,114

1,874

68%

2,183

3,364

54%

As a % of revenues

9.2%

13.5%

9.5%

12.8%

D&A expense increased 68% in Q2 2015 compared with Q2 2014, reflecting investments in servers and data centers made in 2014 and the first half of 2015, as well as the material appreciation of the U.S. dollar and Euro in Q2 2015 compared with Q2 2014.

As a result of the factors described above, income from operations was RUB 2.2 billion ($39.5 million) in Q2 2015, a 40% decline from Q2 2014, while adjusted EBITDA was RUB 4.8 billion ($86.8 million) in Q2 2015, down 4% from Q2 2014.

Interest income, net in Q2 2015 was RUB 356 million, up from RUB 203 million in Q2 2014. The significant growth is due to increased interest rates on our short-term deposits partly offset by an increase in interest expense on our U.S. dollar denominated 1.125% convertible senior notes following the material appreciation of the U.S. dollar.

Foreign exchange loss in Q2 2015 was RUB 1,869 million, compared with a foreign exchange loss of RUB 625 million in Q2 2014. This loss is due to the depreciation of the U.S. dollar during Q2 2015 from RUB 58.4643 to $1.00 on March 31, 2015, to RUB 55.5240 to $1.00 on June 30, 2015. Yandex's Russian operating subsidiaries' functional currency is the Russian ruble, and therefore changes due to exchange rate fluctuations in the ruble value of these subsidiaries' monetary assets and liabilities that are denominated in other currencies are recognized as foreign exchange gains or losses in the income statement. Although the U.S. dollar value of Yandex's U.S. dollar-denominated assets and liabilities was not impacted by these currency fluctuations, they resulted in a downward revaluation of the ruble equivalent of these U.S. dollar-denominated monetary assets and liabilities in Q2 2015.

Income tax expense for Q2 2015 was RUB 342 million, down from RUB 821 million in Q2 2014. Our effective tax rate of 44.7% in Q2 2015 was significantly higher due to the increased effect of non-deductible SBC expense and valuation allowances on our consolidated effective tax rate following the decrease of net income before taxes of our principal Russian operating subsidiary.

During Q2 2015, we repurchased $24.3 million in aggregate principal amount of our 1.125% convertible senior notesdue 2018 for approximately $21.4 million.

The total number of shares issued and outstanding as of June 30, 2015 was 318,651,572, including 263,755,966 Class A shares, 54,895,605 Class B shares, and one Priority share and excluding 11,405,182 Class A shares held in treasury and all Class C shares outstanding solely as a result of the conversion of Class B shares into Class A shares; all such Class C shares will be cancelled. There were also employee share options outstanding to purchase up to an additional 4.2 million shares, at a weighted average exercise price of $5.93 per share, of which options to purchase 4.2 million shares were fully vested; equity-settled share appreciation rights (SARs) equal to 0.5 million shares, at a weighted average measurement price of $28.21, 0.3 million of which were fully vested; and restricted share units (RSUs) covering 6.5 million shares, of which RSUs to acquire 1.4 million shares were fully vested.

In April 2015, we offered 14 employees an opportunity to exchange their outstanding SAR awards for new RSU awards, based on an exchange ratio of 2:1. The vesting of the replacement RSU awards was extended by 12 months beyond the original vesting schedule of the exchanged SAR awards. In addition, no exercise of the replacement RSUs will be permitted until April 10, 2016. A total of 14 employees, including certain senior employees, exchanged an aggregate of 1,663,750 SARs for an aggregate of 831,875 RSUs.

Also, in June 2015, we offered 51 additional non-senior employees an opportunity to exchange their outstanding SAR awards for new RSU awards, based on an exchange ratio of 2:1. The replacement RSUs were subject to the same vesting schedule as the existing SARs. A total of 41 employees exchanged an aggregate of 106,850 SARs for an aggregate of 53,426 RSUs. Such exchange was completed in July 2015, and is not reflected in the outstanding equity award numbers as of June 30, 2015 set out above.

Outlook for 2015

Currently we expect our revenue to grow in the range of 11% to 13% in 2015 compared with 2014.

Conference Call Information

Yandex's management will hold an earnings conference call on July 30, 2015 at 8:00 AM U.S. Eastern Time (3:00 PM Moscow time; 1:00 PM London time).

To access the conference call live, please dial:

US: +1 877 280 1254
UK: +44(0)20 3427 1917
Russia: 8 800 500 9312

Passcode: 3013180

A replay of the call will be available through August 5, 2015. To access the replay, please dial:

Yandex (Nasdaq:YNDX) is one of the largest European internet companies, providing a wide variety of search and other online services. Yandex's mission is to help users solve their everyday problems by building people-centric products and services. Based on innovative technologies, the company provides the most relevant, locally tailored experience on all digital platforms and devices. Yandex operates Russia's most popular search engine and also serves Ukraine, Belarus, Kazakhstan and Turkey.

This press release contains forward-looking statements that involve risks and uncertainties. These include statements regarding our anticipated revenues for 2015. Actual results may differ materially from the results predicted or implied by such statements, and our reported results should not be considered as an indication of future performance. The potential risks and uncertainties that could cause actual results to differ from the results predicted or implied by such statements include, among others, macroeconomic and geopolitical developments affecting the Russian economy, fluctuations in the value of the Russian ruble, competitive pressures, changes in advertising patterns, changes in user preferences, changes in the political, legal and/or regulatory environment, technological developments, and our need to expend capital to accommodate the growth of the business, as well as those risks and uncertainties included under the captions "Risk Factors" and "Operating and Financial Review and Prospects" in our Annual Report on Form 20-F for the year ended December 31, 2014, which is on file with the Securities and Exchange Commission and is available on our investor relations website at http://ir.yandex.com/sec.cfm and on the SEC website at www.sec.gov. All information in this release and in the attachments is as of July 30, 2015, and Yandex undertakes no duty to update this information unless required by law.

USE OF NON-GAAP FINANCIAL MEASURES

To supplement our consolidated financial statements, which are prepared and presented in accordance with US GAAP, we present the following non-GAAP financial measures: ex-TAC revenue, adjusted EBITDA, adjusted EBITDA margin, adjusted ex-TAC EBITDA margin, adjusted net income, adjusted net income margin and adjusted ex-TAC net income margin. The presentation of these financial measures is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with US GAAP. For more information on these non-GAAP financial measures, please see the tables captioned "Reconciliations of non-GAAP financial measures to the nearest comparable US GAAP measures", included following the accompanying financial tables. We define the various non-GAAP financial measures we use as follows:

Adjusted EBITDA means net income plus (1) depreciation and amortization, (2) share-based compensation expense, (3) accrual of expense related to the contingent compensation that was payable to employees in connection with certain business combinations and (4) provision for income taxes, less (A) interest income and (B) other income/(expense)

Adjusted net income means US GAAP net income plus (1) SBC expense adjusted for the income tax reduction attributable to SBC expense, (2) accrual of expense related to the contingent compensation that was payable to certain employees in connection with certain business combinations, (3) foreign exchange losses (less foreign exchange gains) adjusted for the (reduction) increase in income tax attributable to the foreign exchange losses / (gains) and (4) amortization of debt discount related to our convertible debt adjusted for the related reduction in income tax; less gain from repurchases of our convertible notes adjusted for the related increase in income tax

Adjusted net income margin means adjusted net income divided by US GAAP revenues

These non-GAAP financial measures are used by management for evaluating financial performance as well as decision-making. Management believes that these metrics reflect the organic, core operating performance of the company, and therefore are useful to analysts and investors in providing supplemental information that helps them understand, model and forecast the evolution of our operating business.

Although our management uses these non-GAAP financial measures for operational decision making and considers these financial measures to be useful for analysts and investors, we recognize that there are a number of limitations related to such measures. In particular, it should be noted that several of these measures exclude some costs, particularly share-based compensation, that are recurring. In addition, the components of the costs that we exclude in our calculation of the measures described above may differ from the components that our peer companies exclude when they report their results of operations.

Below we describe why we make particular adjustments to certain US GAAP financial measures:

TAC

We believe that it may be useful for investors and analysts to review certain measures both in accordance with US GAAP and net of the effect of TAC, which we view as comparable to sales commissions but, unlike sales commissions, are not deducted from US GAAP revenues. By presenting revenue, adjusted EBITDA margin and adjusted net income margin net of TAC, we believe that investors and analysts are able to obtain a clearer picture of our business without the impact of the revenues we share with our partners.

SBC

SBC is a significant expense item, and an important part of our compensation and incentive programs. As it is a non-cash charge, however, and highly dependent on our share price at the time of equity award grants, we believe that it is useful for investors and analysts to see certain financial measures excluding the impact of these charges in order to obtain a clear picture of our operating performance.

Acquisition-related costs

We may incur expenses in connection with acquisitions that are not indicative of our recurring core operating performance. In particular, we are required under US GAAP to accrue as expense the contingent compensation that is payable to certain employees in connection with certain business combinations. We eliminate these acquisition-related expenses from adjusted EBITDA and adjusted net income to provide management and investors a tool for comparing on a period-to-period basis our operating performance in the ordinary course of operations.

Foreign exchange gains and losses

Because we hold significant assets in currencies other than our Russian ruble operating currency, and because foreign exchange fluctuations are outside of our operational control, we believe that it is useful to present adjusted net income and related margin measures excluding these effects, in order to provide greater clarity regarding our operating performance.

Amortization of debt discount

We also adjust net income for interest expense representing amortization of the debt discount related to our convertible notes issued in Q4 2013 and Q1 2014. We have eliminated this expense from adjusted net income as it is non-cash in nature and is not indicative of our ongoing operating performance.

Gain from repurchases of convertible debt

Adjusted net income also excludes a gain from the repurchase of $24.3 million in principal amount of our 1.125% convertible senior notes due 2018 for approximately $21.4 million that we recorded in the quarter ended June 30, 2015. We have eliminated this gain from adjusted net income as it is not indicative of our ongoing operating performance.

The tables at the end of this release provide detailed reconciliations of each non-GAAP financial measure we use to the most directly comparable US GAAP financial measure.

YANDEX N.V.

Unaudited Condensed Consolidated Balance Sheets

(in millions of Russian rubles and U.S. dollars, except share and per share data)

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization of property and equipment

1,076

1,765

31.8

Amortization of acquisition‑related intangible assets

38

109

2.0

Amortization of debt discount and issuance costs

190

218

3.9

Share‑based compensation expense

275

594

10.7

Deferred income taxes

(72)

230

4.1

Foreign exchange losses

625

1,869

33.7

Other

--

(105)

(1.9)

Changes in operating assets and liabilities excluding the effect of acquisitions:

Accounts receivable, net

(169)

58

1.0

Prepaid expenses and other assets

(984)

1,212

21.8

Accounts payable and accrued liabilities

650

141

2.6

Deferred revenue

(4)

(128)

(2.3)

Net cash provided by operating activities

4,021

6,386

115.0

CASH FLOWS USED IN INVESTING ACTIVITIES:

Purchase of property and equipment

(2,146)

(4,026)

(72.5)

Proceeds from sale of property and equipment

--

27

0.5

Acquisitions of businesses, net of cash acquired

--

(118)

(2.1)

Investments in non‑marketable equity securities

(36)

(43)

(0.8)

Proceeds from maturity of debt securities

--

521

9.4

Investments in term deposits

(1,717)

(18,683)

(336.5)

Maturities of term deposits

--

9,114

164.1

Loans granted

(178)

--

--

Net cash used in investing activities

(4,077)

(13,208)

(237.9)

CASH FLOWS USED IN FINANCING ACTIVITIES:

Proceeds from exercise of share options

38

63

1.2

Repurchases of convertible debt

--

(1,336)

(24.1)

Repurchases of ordinary shares

(3,576)

--

--

Net cash used in financing activities

(3,538)

(1,273)

(22.9)

Effect of exchange rate changes on cash and cash equivalents

(1,321)

(909)

(16.4)

Net change in cash and cash equivalents

(4,915)

(9,004)

(162.2)

Cash and cash equivalents at beginning of period

25,751

18,434

332.0

Cash and cash equivalents at end of period

20,836

9,430

169.8

YANDEX N.V.

Unaudited Condensed Consolidated Statements of Cash Flows

(in millions of Russian rubles and U.S. dollars)

Six months ended June 30,

2014

2015

2015

RUB

RUB

$

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

5,076

2,550

45.9

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization of property and equipment

2,109

3,143

56.6

Amortization of acquisition‑related intangible assets

74

221

4.0

Amortization of debt discount and issuance costs

373

491

8.8

Share‑based compensation expense

530

1,154

20.7

Deferred income taxes

(49)

(105)

(1.9)

Foreign exchange (gains)/losses

(22)

1,153

20.8

Other

(26)

(215)

(3.9)

Changes in operating assets and liabilities excluding the effect of acquisitions:

Accounts receivable, net

(106)

(783)

(14.1)

Prepaid expenses and other assets

(1,489)

661

12.0

Accounts payable and accrued liabilities

336

(733)

(13.1)

Deferred revenue

(184)

(44)

(0.8)

Net cash provided by operating activities

6,622

7,493

135.0

CASH FLOWS USED IN INVESTING ACTIVITIES:

Purchase of property and equipment

(4,211)

(8,862)

(159.6)

Proceeds from sale of property and equipment

--

27

0.5

Acquisitions of businesses, net of cash acquired

(146)

(186)

(3.3)

Investments in non‑marketable equity securities

(36)

(54)

(1.0)

Proceeds from sale of equity securities

120

--

--

Proceeds from maturity of debt securities

--

2,844

51.2

Investments in term deposits

(11,926)

(21,910)

(394.6)

Maturities of term deposits

--

15,375

276.9

Loans granted

(209)

--

--

Escrow cash deposit

(137)

58

1.0

Net cash used in investing activities

(16,545)

(12,708)

(228.9)

CASH FLOWS USED IN FINANCING ACTIVITIES:

Proceeds from exercise of share options

86

91

1.6

Proceeds from issuance of convertible debt

2,981

--

--

Repurchases of convertible debt

--

(2,717)

(48.9)

Payment of debt issuance costs

(42)

--

--

Repurchases of ordinary shares

(7,334)

--

--

Net cash used in financing activities

(4,309)

(2,626)

(47.3)

Effect of exchange rate changes on cash and cash equivalents

1,674

(374)

(6.8)

Net change in cash and cash equivalents

(12,558)

(8,215)

(148.0)

Cash and cash equivalents at beginning of period

33,394

17,645

317.8

Cash and cash equivalents at end of period

20,836

9,430

169.8

YANDEX N.V.

RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES

TO THE NEAREST COMPARABLE US GAAP MEASURES

Reconciliation of Ex-TAC Revenues to US GAAP Revenues

In RUB millions

Three months

Six months

ended June 30,

ended June 30,

2014

2015

Change

2014

2015

Change

Total revenues

12,158

13,920

14%

23,043

26,259

14%

Less: traffic acquisition costs (TAC)

2,651

3,022

14%

5,219

5,739

10%

Ex-TAC revenues

9,507

10,898

15%

17,824

20,520

15%

Reconciliation of Adjusted EBITDA to US GAAP Net Income

In RUB millions

Three months

Six months

ended June 30,

ended June 30,

2014

2015

Change

2014

2015

Change

Net income

2,396

423

-82%

5,076

2,550

-50%

Add: depreciation and amortization

1,114

1,874

68%

2,183

3,364

54%

Add: share-based compensation expense

275

594

116%

530

1,154

118%

Add: compensation expense related to contingent consideration

7

153

n/m

7

188

n/m

Less: interest income, net

(203)

(356)

75%

(375)

(840)

124%

Add: other loss/(income), net

617

1,787

190%

(51)

954

n/m

Add: provision for income taxes

821

342

-58%

1,699

1,018

-40%

Adjusted EBITDA

5,027

4,817

-4%

9,069

8,388

-8%

Reconciliation of Adjusted Net Income to US GAAP Net Income

In RUB millions

Three months

Six months

ended June 30,

ended June 30,

2014

2015

Change

2014

2015

Change

Net income

2,396

423

-82%

5,076

2,550

-50%

Add: SBC expense

275

594

116%

530

1,154

118%

Less: reduction in income tax attributable to SBC expense

(5)

(11)

120%

(10)

(20)

100%

Add: compensation expense related to contingent consideration

7

153

n/m

7

188

n/m

Less: foreign exchange loss/(gain)

625

1,869

199%

(22)

1,153

n/m

Add: increase in income tax attributable to foreign exchange gain

(125)

(374)

199%

4

(247)

n/m

Less: gain from repurchases of convertible debt

--

(40)

n/m

--

(150)

n/m

Add: increase in income tax attributable to gain from repurchases of convertible debt

--

11

n/m

--

38

n/m

Add: amortization of debt discount

190

218

15%

373

491

32%

Less: reduction in income tax attributable to amortization of debt discount

(45)

(52)

16%

(88)

(117)

33%

Adjusted net income

3,318

2,791

-16%

5,870

5,040

-14%

Reconciliation of Adjusted EBITDA Margin and Adjusted Ex-TAC EBITDA Margin to US GAAP Net Income Margin

In RUB millions

US GAAP
Actual Net
Income

Net Income
Margin (1)

Adjustment
(2)

Adjusted
EBITDA

Adjusted
EBITDA
Margin (3)

Adjusted
Ex-TAC
EBITDA
Margin (4)

Three months ended June 30, 2015

423

3.0%

4,394

4,817

34.6%

44.2%

Six months ended June 30, 2015

2,550

9.7%

5,838

8,388

31.9%

40.9%

(1) Net income margin is defined as net income divided by total revenues.

(2) Adjusted to eliminate depreciation and amortization expense, SBC expense, expense related to contingent compensation, interest income, net, other loss/(income), net, and provision for income taxes. For a reconciliation of adjusted EBITDA to net income, please see the table above.

(3) Adjusted EBITDA margin is defined as adjusted EBITDA divided by total revenues.

(4) Adjusted ex-TAC EBITDA margin is defined as adjusted EBITDA divided by ex-TAC revenues. For a reconciliation of ex-TAC revenues to GAAP revenues, please see the table above.

Reconciliation of Adjusted Net Income Margin and Adjusted Ex-TAC Net Income Margin to US GAAP Net Income Margin

In RUB millions

US GAAP
Actual Net
Income

Net Income
Margin (1)

Adjustment
(2)

Adjusted
Net Income

Adjusted
Net Income
Margin (3)

Adjusted
Ex-TAC
Net Income
Margin (4)

Three months ended June 30, 2015

423

3.0%

2,368

2,791

20.1%

25.6%

Six months ended June 30, 2015

2,550

9.7%

2,490

5,040

19.2%

24.6%

(1) Net income margin is defined as net income divided by total revenues.

(2) Adjusted to eliminate SBC expense (as adjusted for the income tax reduction attributable to SBC expense), expense related to contingent compensation, foreign exchange loss (as adjusted for the increase in income tax attributable to the loss), gain from repurchases of convertible debt (as adjusted for the reduction in income tax attributable to the gain) and amortization of debt discount (as adjusted for the reduction in income tax attributable to the expense). For a reconciliation of adjusted net income to net income, please see the table above.

(3) Adjusted net income margin is defined as adjusted net income divided by total revenues.

(4) Adjusted ex-TAC net income margin is defined as adjusted net income divided by ex-TAC revenues. For a reconciliation of ex-TAC revenues to US GAAP revenues, please see the table above.